Exxon Mobil (XOM) is considered the largest integrated energy company in the world based upon production volume or holdings of oil and natural gas reserves. The company has sales in over 200 countries. The company’s exposure to product price volatility is limited by its diversity of markets and organizational reach.
Management at Exxon Mobil believes the company has the largest oil refining operations in the world and also supplies the most polyolefins, paraxylene, and benzene. ExxonMobil has added refining capacity over the last fifteen years that is equivalent to building an average size refinery every three years.
The company has the largest proven petroleum reserves and production in North America. Exxon Mobil also produces the greatest amount of oil and gas in Europe. Subsidiary and affiliate operations of Exxon Mobil dominate petroleum production in Canada, a region of rising global significance in the industry.
The 2012 outlook for integrated petroleum companies is positive. This forecast is supported by the expectation of higher crude oil prices, a stable US economy, and international economic strength in developing markets. The US Energy Information Administration estimates that global demand for oil increased by over one million barrels per day in 2011.
Oil prices reached substantial highs in early 2011 during export disruptions in Libya and political unrest throughout the Middle East and North Africa. A price retreat occurred later in the year upon evidence of slowing global economies. Recently, US oil prices began to climb. Growing production volume from shale in the Rockies and mid-continent plus higher inflow from Canada has led to a supply level that tempers a further near-term price rise.
High inventories and increased shale production have pressured natural gas prices even more than the price of oil. A continued low price for gas is anticipated for 2012. Data from the US Energy Information Administration indicate that spot prices for gas should average $3.53 per million Btu in 2012 versus $4.00 in 2011.
While energy companies were a volatile stock market sector in 2011, the group remains heavily affected by the direction of economies in the US and China. Greater stability in the US appears likely while the outlook in China is still unclear. The situation in Europe seems to change almost daily but so far the overall European economy has averted recession. Austerity measures in several countries dampen prospects for economic growth in the European region.
Any improvements in economic conditions favor rising energy prices. However, a dramatic price increase in the near-term can actually hamper demand for oil and gas as consumer behavior adjusts. Long-term growth potential in developing countries represents a future stimulus to demand for fuel. In addition, the prospect for supply disruptions due to Middle East tensions remains a case for higher oil prices. Alternatively, the decline of natural gas prices over recent months is an obstacle to higher profits for many energy companies.
Exxon Mobil stock is a core holding in most institutional portfolios. Price performance is substantial on many occasions and the company has a stable dividend history in all economic environments. A production mix that is currently slanted toward natural gas potentially limits company growth in the near future. Low prices for natural gas should hinder profit increases at Exxon Mobil.
Although Exxon Mobil has recently allocated more capital to oil exploration, the production volume has remained flat. The focus on natural gas – particularly related to US production – is a long-term investment decision that is expected to have positive operational efficiencies. However, in the near-term, stronger economic factors favor oil and liquids refining. Unless Exxon Mobil decides upon more aggressive action with its oil properties, the stock of peer companies make compelling investment alternatives. Many have stronger balance sheets and higher dividend yields.
A concentration at ConocoPhillips (COP) in the production of oil has resulted in rising cash flow and earnings at the company. ConocoPhillips has also benefited from the disposal of less profitable assets, including its holdings in chemicals. The dividend yield is much higher than Exxon Mobil and the stock of ConocoPhillips is at least as attractive for long-term price appreciation.
The earnings per barrel at Exxon Mobil substantially lag that of Chevron. Unlike Exxon Mobil operations, production at Chevron favors oil over natural gas. Chevron has a stronger long-term production growth profile with a forecasted rise in million barrels of oil equivalent per day from 2,763 in 2010 to 3,300 in 2017. A number of projects are expected to begin production in 2014 through 2017. Chevron also boasts a compelling dividend yield.
The story at BP Plc (BP) is still murky. Concerns remain about recent positive developments overcoming liability the company faces for its role in the 2010 Gulf of Mexico incident. In addition, some setbacks have occurred in BP operations. These include a failed effort to enter into an Artic exploration deal and collapse in negotiations to sell company assets in Argentina. Significant obstacles remain for BP despite recent permitting activity in the Gulf. BP has so far failed to deliver on its goal for disposing of weak assets. Coupled with uncertainty about BP’s ultimate liability exposure to the Gulf disaster, the stock remains unattractive for most investors.
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